Renting and owning a home is very different. When you rent an apartment or home, your rent becomes a profit for the owners. You never gain more value by paying more rent. On the other hand, paying a mortgage creates financial value that belongs to you. It is an investment that can be passed on.
What Is Equity in a Home?
The value you accumulate as a homeowner is called equity. Equity increases with every payment you make on your mortgage. It is the part of the home’s total value you have paid off. When you have paid off your mortgage, you hold equity equal to the home’s value.
When you first get your mortgage, you hold no equity (except for what you pay as a down payment). The lender controls the equity. As you gain more equity, you create wealth. As long as you keep paying your mortgage, the lender can’t take equity away. Though if you take out a loan against the value of your home or take out another mortgage, you lose equity.
If you pay off your mortgage you’ll hold 100% equity in your home. You can pass this wealth down. This is called generational wealth, wealth that grows and helps support future generations.
Equity in Owning vs. Renting
Getting a mortgage may seem complicated. But when you compare renting to homeownership, the wealth you can build in just a few years makes homeownership the clear winner. Plus, your mortgage will not go up if it is a “fixed rate” mortgage, while rents have the tendency to fluctuate over time.
In August 2022, the median home listing price in Minneapolis was $325,000. For a $325,000, 30-year mortgage at a 3.5% interest rate, your monthly mortgage payment would be $1,459.
The average 2-bedroom, single-family home apartment in Minneapolis is $1,375.
As you pay your mortgage, your equity grows:
- After a year of paying your mortgage, you would have just under $1,539 in equity
- In the second year, you would have about $7,830 in equity
- In the third year, you would have more than $14,300 in equity
What would happen if you stayed a renter during that time instead? You would not gain equity wealth.
On the average apartment, you would pay around $49,500 in rent. That assumes rent continues to rise. None of that money would produce wealth for you—it would go to your landlord.
Tax Benefits of Homeownership
Homeowners get special tax benefits. The biggest is deductions (tax savings) on your interest. Interest is the part of a mortgage payment that does not increase equity. It is profit for the lender. Since you take this interest off your taxes, it saves you money when you file.
Increasing Your Home Value
As you increase your home’s value, the total amount of equity goes up. On average, home value slowly rises over time as the population grows. You can further boost the value of your home through projects, updates, and renovations.
Something as simple as new paint can raise a home’s value. So can bigger investments like a new roof or a deck. Regular home maintenance helps, too. It is up to you how much to invest to increase your home’s value and enjoy the benefits.
As you increase the value and equity of your home, you are building something that can be passed on to the next generation. Affordable housing not only helps to build generational wealth but also aids in closing the racial wealth gap. With better accessibility, there are more opportunities for minority families to achieve homeownership for not only themselves but for generations to come.